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OPEC keeps production levels steady

OPEC said Wednesday that it was leaving its production levels unchanged for the moment, signaling that it was more concerned with slowing economic growth than with high oil prices.

The oil cartel rejected calls from oil consumers, including the United States, to increase output to drive down prices. Saudi Arabia had initially said the group would consider increasing production by 500,000 barrels a day but backed down in the face of opposition from other OPEC members after oil prices fell last week.

With oil prices still around $90 a barrel, today’s decision suggests that producers have significantly increased their minimal target price for oil. Analysts now believe that OPEC’s new floor to be around $70 to $80 a barrel.
Given the volatility in oil markets, the Organization of the Petroleum Exporting Countries said it would meet again in February to review its decision and fine-tune its supply levels.

OPEC repeated its long-held view that there was no shortage of oil on the market and that global crude inventories, which are held by oil companies and refineries around the world, were at a comfortable level. OPEC said the reason prices have risen to nearly $100 a barrel in recent weeks had nothing to do with supply and demand but was instead the result of trading activities by commodity investors and hedge funds, and geopolitical instability.

“We have enough stocks in the market,” Abdallah Salem El-Badri, OPEC’s secretary-general, told reporters in Abu Dhabi, where the organization was meeting. “There is no reason for the price of oil to go to $100 a barrel.”

Still, oil prices rose after the meeting as some traders had anticipated an increase in production. Crude oil for January delivery gained as much as $2.07, or 2.3 percent, to $90.39 a barrel on the New York Mercantile Exchange. Prices have risen 44 percent in the past year. Last month, they reached a high of $99.29 a barrel.

Today’s decision means OPEC remains concerned about a potential slowdown in economic activity that could pare the demand for oil and push prices down. It also signals that the oil cartel does not want to see oil prices fall back to $50 a barrel, as they did in January, nor does it want prices at $100 a barrel.

Since 2000, OPEC’s policy has been to fine-tune its supplies to track closely with oil demand but without allowing oil companies and refiners to build too many oil inventories. That policy of careful management has helped the cartel raise prices since the oil collapse of the late 1990s.

Over the last year, OPEC has pared down its production in a bid to push down the level of commercial oil stocks held in developed nations. Saudi Arabia, OPEC’s top producer, in particular was concerned about higher-than-average oil stock levels and helped engineer a pair of production cuts totaling 1.7 million barrels a day.

While OPEC’s real production only dropped by about 1 million barrels a day after the cuts, the strategy succeeded in forcing refiners to draw on their inventories. Between October 2006 and October 2007, the total oil and product stocks in the United States, Europe and Japan fell by 138 million barrels, according to Lawrence Goldstein, an economist at the Energy Policy Research Foundation.

But the strategy also contributed to a sharp spike in oil prices, which went from $50 a barrel in January to nearly $100 a barrel last month. OPEC tried to correct its aim in September by increasing supplies by 500,000 barrels a day, but the new supplies had only a limited effect on prices.

“They have fully achieved their objective,” Goldstein said. “In fact they have more than succeeded. The current levels are making them uncomfortable.”

The jump in prices seemed to frustrate oil producers, who have been trying to toe a delicate line in recent months.
OPEC is not insensitive to higher oil prices, which can lead to lower demand for oil. But the group was facing a difficult decision today given fears that the American economy might be slowing down. In that context, adding more oil in the market might have pushed down prices far below the group’s comfort level.

Last week, oil prices had dropped more than 10 percent, their steepest weekly decline in more than two years.
As a group, OPEC’s 13 members account for 40 percent of the world’s daily oil exports, making them the only producers capable of raising their output in a meaningful manner. Together, they now have about 2.5 million barrels a day of spare capacity, according to analyst estimates, mostly in Saudi Arabia.

The group’s final statement expressed OPEC’s concerns with market speculation that has driven up prices. Specifically, it blamed “a heavy influx of financial funds into commodities and speculative activity in the markets” for contributing to higher volatility.

The effect of speculation on commodity prices is also becoming a concern in the United States. A powerful Congressional committee said today that it would be holding hearings on that topic next week in Washington.

The group said that given the need for “extreme vigilance” in managing the oil market in coming months, it would meet again on Feb. 1, ahead of a scheduled meeting in early March.

In addition to the discussion about winter supplies, today’s OPEC meeting also tended to some housekeeping matters. The group’s two newest members—Angola and Ecuador—were each assigned a production quota to regulate their production in the future. The quotas are 1.9 million barrels and 520,000 barrels a day, respectively.

Angola currently pumps around 1.8 million barrels a day and plans to lift its output to 2 million barrels a day next year 2008. Ecuador produces about 500,000 barrels a day.

Marseille,12 17 2007
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